UNIVERSITI PUTRA MALAYSIA

FACTORS INFLUENCING FOREIGN DIRECT INVESTMENT IN THE MANUFACTURING SECTOR OF MALAYSIA

ZULKORNAIN YUSOP

FEP 1992 3

� INFWE%«:ING F<m:ICB DlIm:'l' INVES'lJBfl' IN THE MANUFACroRING SEC'l\R OF MAI...AYSIA

by

ZOLJ«RQUN YUSOP

Thesis Subnitted in Partial Ful fi lment of the Requirements for the Degree of Master of Science in the

Facul ty of Econanics and Hanaqement , Universiti Pertanian Malaysia

March, 1992

I wish to express rnf deepest gratitude to the chainman of

the supervisory cannittee, Associate Professor Dr . Roslan A .

Ghaf far, for his time, patience, comments, guidance and

encouragement throughout the period of the study . My special

thanks are also due to two carmi. ttee members, Dr . Zakariah

Ab:iul Rashid and Associate Professor Haji Shahril Haji Alxiul

Karim, for their very useful advices and ccmnents .

I would also like to thank Universiti Pertanian Malaysia

for granting the study leave and providing financial support

during the period of my study .

A sincere appreciation also goes to all of the lecturers,

faculty staff and friends who were involved directly orC

indirectly in the study . Finally, I am very grateful to my

parents, my wife and son for their consistent rroral support,

encouragement and patience .

ii

Page

Ac:::KN<JolLEDGES

LIST OF TABLES . . • • . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

LIST OF FIGURES ix

LIST OF ABBREVIATIONS x

ABSTRAK

I

xi

xiii

INTROOOCTION 1

Pattern of Foreign Direct Investment in Malaysia • . . . . • . . . . . . • • • . . . • . . . 1

Incentives for Investment in Manufacturing • • . . • . • . . . . • . • • . . • . • . . . • . . . . 10

Impact of Industrialization 16

Several Weaknesses of Industrialization in Malaysia . . . . • . . . • • . . . . . . . . . . . . . . . . • . . . . . . 26

Narrow-Based Industrialization

Lacking in the Use of Local Resources

Distribution of FDI

Statement of the Problem

Objectives of the Study

HypQthesis

Significance of the Study

iii

26

33

35

37

40

41

42

I I

I I I

LITERATURE REVIm . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Definition of Foreign Direct Investrrent 44

Mul tinational Corporation (MNC) 46

Importance of Foreign Direct Investrrent 49

Efforts to Promote Foreign Direct Invest.n'el1t . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Tax Incentive Scheme

Factors that Increase Foreign Direct Invest.n'el1t

Environmental Changes

Technological Changes

Structural Business Firm Changes

Devel opment of Foreign Direct Investment Theory

53

56

56

57

58

59

Comparative Advantage Theory . . . . . . . . . . . . . 61

Industrial Organization Theory . . . . . . . . . . . 65

Investment Theory

Survey on Detetminants of Foreign Direct Investment

ME:I'HODOLOGY

Introduction

Models for Foreign Direct

71

74

82

82

Invest.rr&1.t stOOi.es . • . • . . . • . . . . . . • . . . . . . . • . . . 84

Sarrpl e Population . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Quantitative Method . . • . . • . • . • • . • • . . . • • . . . . . . 91

Dependent Variabl e 92

Independent Variables 93

iv

IV

v

Characteristics of a Good Model ............. 100

Data Transformation

Qualitative Method

Econarrdc and Social Factors

Political and Policy Factors

Sample for the Questionnaire

RESULTS OF ANALYSIS

Empirical Analysis

Estimation of General Models

103

105

106

113

116

119

119

119

Modified Models . • . . • . . • • . . . . . . . . . . . . . . . . • 123

Analysis on the Results of Regressions . • • • • • • . . . . . . • • . • . . . . . . . . . . 129

Qualitative Results 137

Factors Affecting FDI Decision by MNCS in the Manufacturing Industries in Malaysia . • . . . . • . . • . • . . • . • . . . . . . . • . • • . • 137

Attractiveness of Malaysia as an

Investment Centre . . . . . . . . . . • . . . • • . . . . . . . . 145

Wea)messes and Limitations of Malaysia as an Investment Centre • • . • • • • • • . • • • • • • • . 149

Comparing the Qualitative and Quantitative Results

SUMMARY AND DMPLIClTION . . . . . . . . . . . . . . . . . . . . .

151

154

BIBLIOGRAPIiY • . . . . . . . . . . . . . . . . . • . . . • . . . . . . . . . . • . . 165

ADDITIONAL REFERmCE

APPmDICES

A Sal ient Features of Pioneer Industries Ordinances, 1958

v

172

173

B Investment Incentive Act , 1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

C Industrial Co-ordination Act ( ICA) , 1975 . . . . . . . . . . . . . . . . . . . . . . . . 181

D Industrial Master Plan . . . . . . . . . . • . . . . . . 183

E Recent ( 1985 ) Amendments to the Industrial Coordination Act ( ICA ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

F Praootion of Investrrent Act , 1986 . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 187

G Types of Investrrent Incentives . . . . . . . . . 191

H Questionn.a.ire .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 195

VITA .. ...... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 203

Table

1

2

LIST OF TABLES

Malaysia : Gross Domestic Product by Industrial Origin (as percentage of GNP) • • • • • • • • • • • • • . .

Components of Malaysian Exports (as percentage of total val ue)

3 Malaysia : Gross National Products (GNP) , Gross Export Proceeds (GEP) and the

page

3

4

Ratio of GEP/CBP • . • • • • • • • • • • • • • • • • • • • . • • • • • • 6

4

5

6

7

8

9

10

11

12

Average World Prices of Selected Export Cammcdities . . . . . . . . . . . . . . . . • . . . . . . . . .

Malaysia : Average Annual Growth Rate of Major sectors (in percentage) . • . . . • . . . • . . . . . . . . . . .

Malaysia : Employment by Sector ( ' 000 ) . . . . . . . . .

Share of Foreign Equities in Malaysian Manufacturing : by cOlmtry (percentage of total ) . . . . . . . • . • . • . . . . . . . . . . .

Malaysia : NUlber of Approvals Granted for Establishment of Manufacturing Projects by Industry ( 1984-1989) . . . . . . . . . • . . . • . . . • . . . . • .

Malaysia : capital Investment in Approvals Granted for Establishment of Manufacturing Projects by Industry ( 1984-1989) . . . • . . . . . . . .

Malaysia : Potential Employment in Approvals Granted for Establ ishment of Mariufacturing Projects by Industry ( 1984-1989) . . . . . . . . . . . .

Malaysia : Export of Manufactured Goods (M$ lTd 11 iOIlS) . . . . . . . . • • . . . . . . . . . . . . . . • . . • . . .

Resul ts of RegressiOIlS

13 Regression Output and Covariance Matrik

7

14

18

21

27

28

31

32

121

for Equation [ 15] . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

vii

14

15

16

Rank of Factors Direct Investment

Influencing Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . .

Several Aspects of Malaysia Which Are trost Attractive to Foreign Investors . • . . . . • . . . . . .

Rank of Weaknesses and Limitations of Malaysia as an Investment Centre ........... .

viii

138

146

150

LIST OF FICDRES

Figure

1 Proposed Capital Investment in

Page

Malaysian Manufacturing . . . . . . . . . . . • . . • . . . • . . 20

2

3

Foreign Equity and Loan in Local Manufacturing , by country ( in 1989)

Malaysia : Net outflow of Investment Incane ( 1976-1988)

4 Malaysia : Ehployment by Industry

22

24

as at Decerri::>er I 1989 . . . . • • . • . . • . • . . . . . . . . . . . . 30

5 Rates of Inflation in Malaysia ( 1970-1988) 135

ix

ASFAN

EEC

ERP

FCC

FDI

GOP

GNP

GATT

IBRD

Lee

LDC

MIDA

NNe

NIC

OECD

RBI

SPEC

UNCTAD

UNDP

LIST OF ABBREVIATICIIS

Asean and Pacific Development Centre

Association of South-East Asian Nations

European Econanic CamImi. ty

Effective Rate of Protection

Foreign Control l ed Company

Foreign Direct Investment

Gross Domestic Product

Gross National Product

General Agreercent on Tariffs and Trade

International Bank for Reconstruction and Development

Local Control l ed Carpany

Less Developed Country

Malaysian Industrial Development Authority

Mininun Efficient Cost

Mul tinational Corporation

Newl y Industrialized Country

Organization for Econanic Co-operation and Development

Resource-Based Industry

South Pacific Bureau for Econanic Cooporatian

United Nations Conference on Trade and Developnent

United Nations Devel opment Programne

Abs t ract of the thesis presented to the senat e o f Universi ti Pertanian Malaysia i n partial ful fi lment of the requirements for the degree of Master of Science.

Chairman

Faculty

FACl'CES I NFW!2fC I NG FClm I af DI RI!rl' INVF.S'DtDfl' I N '!BE MMOF.P£TUR I r«J � c:e MALAYSIA

by

Zulkornain bin Yusop

March, 1992

Associate Professor Roslan A. Ghaffar, Ph. D .

Econanics and Management

This study is meant to identify local (cotmtry-related)

factors that affect foreign di rect investment ( FDI ) in the

manufacturing sector of Mal aysia . FDI in Mal aysia was

concentrated in the agricul tural and extracti ve industries

unti l the earl y post-independent period when ef forts to

diversify the country's econany were initiated. General ly,

industrial ization has brought several posi tive effects ·

however. it also features a few wea1messes such as narrow

manufacturing base and manufactured exports and under

uti l ization of l ocal resources . The di f ferent rates of

investment across the various manufacturing industries in the

cotmtry can be associated with the pattern of FOI which is

xi

concentrated in certain industries such as electrical and

textil e . Therefore , it is inportant to conduct a study on

factors affecting FOI in Malaysia so that policy-makers can

hopeful l y bene f i t f rom the f i ndings of the s tudy i n

making the appropriate policies to improve the distribution of

FOI across the manufacturing industries . Previous studies

show that FDI activities can be exp l ained by theory of

comparative advantage , indus t ri a l organization as wel l as

investment theory . To detetmine the factors influencing FOI in

the Malaysian manufacturing, both quantitative and qualitative

analyses were conducted. In the quantitative analysis , gross

national product (GNP) , level of external reserve ( lagged one

year) , interest rate, manufacturing output/GNP, current profit

of foreign contro l l ed manufacturing companies and total asset

of l oc a l f inanc i a l system show s i gni f i cant pos i t ive

rel ationship with FOI whi l e pub l i c investment rate shows

significant negative relationship . The qualitative analysis

concludes that economic and social stabi l ity ; f reedom of

repatriation; availability of efficient labour force; existence

o f phys i ca l infras t ructures ; e f f i c i ency o f f i nanc i a l

institutions ; tariff and trade protection; currency stabi lity;

market availabi l ity; and public sector efficiency are among the

roost inportant detetminants of FOI .

Abstrak tesis yang diken1.1kakan kepada Senat Uni versi ti Pertanian Malaysia sebagai memenuhi sebahagian daripada syarat­syarat untuk penganugerahan i jazah Master Sains .

FAKTCR-FAK'l'CR YANG Hl!MPDQRDHI PELAHJRM LMGSUNG ASING DI � PERKIINfCWf IWAYSIA

oleh

Zulkornain Yusop

Mac, 1992

Pengerusi Profesor Madya Roslan A. Gbaffar , Ph.D .

Fakulti Ekonani dan Pengurusan

Kajian ini bertujuan untuk mengenal pasti faktor-faktor

yang IneSTpengaruhi pelaburan langsung asing ( PLA ) dalarn sektor

pembuatan eli Malaysia . PLA di Malaysia telah terturpu pada

bidang pertanian dan industri -industri ekstraktif sehinggalah

pada peringkat awal selepas kemerdekaan apabila usaha-usaha

untuk mempelbagaikan ekonorrd negara bermul a . Pada amnya ,

proses perindustrian telah membawa beberapa kesan yang positif ,

tetapi terdapat juga beberapa kelemahan seperti asas industri

dan eksport barangan pembuatan yang sempit dan penggunaan

sumber-surber tEq)atan yang terhad. Ketidakseimbangan dalam

taburan pelaburan di kalangan berbagai industri perrbuatan di

seluruh negara ini adalah berhubung-kait dengan corak PLA yang

xiii

lebih cenderung kepada industri yang tertentu seperti industri

pembuatan barangan elektrik dan tekstil . Dengan itu, adalah

sangat penting untuk membuat satu kajian tentang faktor-faktor

yang InE!lTPengaruhi PLA kerana ianya bol eh memberi sunbangan yang

penting dalam usaha merangka pol isi -polisi yang sesuai bagi

menyeimbangkan taburan PLA di dalam sektor pembuatan di negara

ini . Kajian-kajian yang l epas menunjukkan bahawa aktiviti PIA

bol eh dite rangkan o l eh teori faedah berbanding , teori

organisasi perindustrian serta teori pelaburan. Untuk mengenal

pasti faktor-faktor yang mempengaruhi PLA dal am sektor

pembuatan di Mal aysia , kedua-dua anal isis kuantitatif dan

kual itatif telah dibuat . Dalam analisis kuantitatif , keluaran

kasar negara (KNK) , paras rizab l uar negeri , kadar faedah,

nisbah junlah pengeluaran sektor perd:ruatan/mK, untung semasa

syarikat pembuatan kawal an asing , serta juml ah harta dal am

sisten kewangan terrpatan memmjukkan perhubungan yang posi ti f

dengan PLA manakala kadar pelaburan awam menunjukkan perkaitan

yang negatif . Kesimpulan daripada anal isis kual i tati f

menggaIl'barkan bahawa kestabilan ekonani. dan politik; kehebasan

pengiriman serrul a untung dan royal ti ke negara asal ; kE!lIlldahan

infrastruktur; tenaga buruh yang cekap; kecekapan insti tusi

kewangan; tarif dan per l indungan perdagangan ; kestabi l an

rratawang; kewujudan pasaran; dan kelicinan sektor awam adalah

antara faktor terpenting yang InC!IIPengaruhi PLA .

xiv

afAPl'Jm 1

Ilfl'ROJlJCl'ICIf

Pattern of Foreign Direct Investment in Malaysia

Foreign investors have been invol ved in the economic

development of Malaysia since the beginning of the century with

British caJi>anies playing a leading role . They were engaged

rrainly in the agricultural and extractive industries for the

purpos e of supp l ying raw mate r i a l s to the Bri t i s h

manufacturing industries (Kanapathy, 1970 ) . In 1936, British

investment in plantation industries represented 70 percent of

its total investment in Malaya1 , 17 percent in mining and

13 percent in infrastructural development , commerce, banking

and transport ( Cal l is , 1942 : 10 9 ) . Invol vement by other

nationals was very minirral and this too was limited to the

American and French who were engaged in a smal l scale in tin

mining, and the Japanese who were in iron ore (Al l en and

Doni thorne , 1954 : 124-129 ) . The pattern of investment

which was concentrated in the agricultural (plantation) and

1 Prior to August 31 , 1957 , Malaya was a British colony . On 16th September, 1963 , together with sabah and Sarawak it fonned a new federation cal l ed Malaysia

1

e x t ractive indus t r i es prevai l ed unt i l the ear l y pos t ­

independent period when the government started to recognize the

need of di versi fying the comtry ' s econanic acti vi ties (Maisan,

1977 ) . The diversification was intended to reduce the over

dependence of the comtry ' s econatU' on the agricul tural and

prirrary carroodities during the early post-independent period

(Ho , 1983 and Fong, 1990 ) .

To i l lustrate the extent of the comtry ' s dependence on

the agricultural and primary carroodities (during the early

post-independent period) , in 1957 , agricul tural sector

accomted for about 46 percent of the total gross domestic

product (GDP) and about 62 percent of the total El'l'Pl oyment .

In 1960 and 1965 , agricul tural sector represented 38 percent

and 32 percent respectively of the comtry ' s total GDP (Tabl e

1 ) . In terms of export , rubber and tin constituted more than

80 percent of the comtry ' s gross export earnings in 1950s ,

and about 60 percent during 1960 and 1965 (see Table 2 for the

detail of Malaysian export carponents) .

The over dependence on the agricul tural and primary

carroodities was not without problems . As Ho ( 1983) stated,

there were four rrajor defects related to the country ' s over

concentration:

'aDl' 1

Nala'li.: 8rOll DoItItic Product b, IIdI.tri.1 Ori,il ( •• perceltate of ., )

1960 1965 1970 1975 1980

Agriculture, livestock, forestry, fishing 38 32 32 30 26

Mining 6 9 6 4 4

Manufacturing 9 10 12 14 17

ConstructioD 3 4 4 5 5

Financ., iDsuraDC' real estate, business 6 6 8 7 7 services

Other services 38 39 38 40 41

3

1985 1989

21 19

10 10

20 27

5 3

9 9

35 32

------------------------------.-------_._-----------------------------_._--------_._._-_.--_._-----

Total 100 100 100 100 100 100 100

I:::.:.:.:.: •• :.::::::::::::::::.::::.:::: •• :.: •• :.::.: ••• ::: •• ::.::.:::::::::::::::::: •• : •• :.:::::

Source: Malaysia, Ministry of Fill.C', EcolOlic Report, various issues

Yule Z

'c .... tJ If 1I1lpia IQlrtJ (II ,.re.tat. of total Ill,.)

4

:::::::::::::::::::::::::::::::::::::::::::::::::::::�:::::::::::::::::::::::::::::::::::::::::

ItelS\ tear

PetroleUi

111uufactured Products

lubber

Pall Oil

tiD

Others

1960

3.7

DI

44

1.7

16

34.6

1965 1970

2.0 16

Da 10

40 33

2.5 5

20.2 20

35.3

1975

9

17

20

14

24

1980

24

21

17.2

8.9

1.9

20

1915 1989

14

35 54.7

8 6.5

10 6.7

3.4 1.8

16.6 16.3

----------... -.--.-.. ---------�---------------------------------------------------_._.----_.-_.

fotll 100 100 100 100 laO 100 100

--------------------------------------------------------------------------------- ----------------.----------_._----------------------------------------------------------------------_._--_._.

1 l a D u fl c t u r e d p r o dac t s i D c lad e f o o d , b ef e r l,e s , t Ob ICCO, teltiles ud clothiD" load products, rubber products, cheaiclls ud petroleUi products, DOD-Ietilic IiDer11 product., letll products, electricil IDd electroDic IIchiDery lid Ipplillces, traDsport equipleDt lid others.

Source: lIallysia, liDistry of riDuce, ICODOIic leport, fariolS issues

5

(1 ) It increased the vulnerabil ity of the econany to

external fluctuation. Since the Malaysian economy was ( in

fact it sti l l is ) very rruch dependent on export sector as

reflected by the high ratios of gross export proceeds over

gross national product (Table 3 ) , the over concentration on the

exports and production of primary commodities made the economy

vulnerable to external fluctuation on which the government had

virtual ly no control. In other words , the econarrdc condition

which was characterized by heavy dependence on export with

narrow base ( l irni ted to a few primary ccmoodi ties ) was very

undesirable and had resulted in a l ess stable danestic econanic

condition because the booms and the depressions of the world

economy were often translated into fluctuations in the prices

o f the expo r t ed commodi t i es in the wor l d market . The

fl uctuations in the prices of rubber and ' tin can be seen in

Table 4 . The price o f rubber ( ribbed smoked sheet , RSSl )

dropped fran 108 . 08 sen (per lb) in 1960 to 70 .04 sen in 1965

and 56 . 43 sen in 1970 , increased to 141 . 68 sen in 1980 and

dropped to 85 . 59 sen in 1985 . Sindlarly the price of tin (M$

per torme) has been fluctuating over the last decades ( 6509 . 37

in 1960 , 11608 . 66 in 1965 and 10990 . 7 6 in 1970 ) . For crude

palm oi l , its price (M$ per tonne) had fluctuated fran 679 . 2

in 1960 to 828 . 3 in 1965 and down to 787 . 2 in 1970 .

table 3

lalarsia: Grall latioDal Product (GIP), Groll Illort Proceeds (GIP)

and Ratio of GIP/GiP

---------------------------------------------------------------------------------------------------- - - ----------------------

Year GNP GEP GlP/GNP ($ mill ion) ($ million) (\)

----- --------------------------------- - - ----------------------

1960 6649 3940 59.3

1965 8632 43 10 49.9

1970 1 1473 5602 48.8

1975 16015 9230 57.6

1980 49422 28 17 1 57.0

1985 72039 457 16 63.5

1989 96447 65800 68.2

------------------------------------------------------------------------------------------ ----------------------------------

Source: Mal aysia, Ministry of Finance, Economic Report, various issues

6

Tlbl. 4

AMra .. Iorld Prieel of Selected E.port eo.odiU ..

Vear\ Ite ..

1960

1965

1970

1975

1980

1985

1989

Ribbed Stoked Sh .. t (RSS1) (sea p.r lb.)

108.08

70.04 ( -35.2')

56.43 ( -19.4')

62.0 ( +9.9')

141.68 (+128.5' )

85.59 (-39.5')

119.05 (+39.0')

Tin (. per tOIl.e)

6509.37

11608.66 ( +78.3')

10990.76 ( -5.3')

15935.9$ ( +45.0')

35716.87 ( +124.n)

29680.00 ( -16.9\)

23020.00 ( -22.4t)

Crude Pal. Oil (. per tonlle)

679.2

828.3 ( +21.5')

787.2 ( -4.9')

1002.2 (+27.3\)

1211.5 ( +20.9\)

1046.0 (-13.7\)

822.2 ( -21.n)

===111= •• = ••••••••••••••••••••••••• :==.=.==.1.= ••• : •• === ••• ==.= ••••• ===.========

Not.: Fioures i. pIT.ath.s •• de.ote perc.lltlg. chlnges

Source: "Illy,il, Balk MegITI, auarterly Ecollo.it Bulletil, vlrious issuts.

7

8

( 2 ) The over concentration on agricul tural and primary

sector in the 1960s was so severe that aloost no industrial

developnent took place. The lack of danestic manufacturing

activities had made the country so dependent on the imports of

manufactured goods to an extent that even relatively simpl e

manufactured consurer items had to be imported . In addition,

it was very difficult to modernize other sectors of the economy

in the absence of industrial developnent .

(3 ) OVer dependence on agricul tural and primary sector

had also l ed to the creation of a dualistic econanic structure .

Since tin mines and rubber plantations were located only in

certain areas suitable for their developnent , and as demand for

the above two products was entirely fram the external sector ,

there was very limited link between these ' 'modern enclaves"

and the traditional agricultural sector . There was aloost no

transfer of technology or ski l l fram the modern sector to the

subsistence sector . As a result , only a smal l section of the

economy benefited from moderni zation brought about by the

devel opment of tin and rubber . This dual istic economi c

structure had accentuated the serious regi ona l and raci al

econanic disparities since a large portion of the indigeneous

popul ation were invol ved in the tradi tiona l subsistence

agricultural and not affected by modernization.

9

(4) The primary sectors , particularly agriculture had

di fficul ties in absorbing the fast growing l abour force

because they were not able to generate sufficient enployment

opportmi ties .

Maisan ( 1977) also concluded that the Malaysian econanic

condi tion during the earl y post-independent period whi ch

specialized in few primary products for export and dependent on

food and other cansuner manufactured goods on irrports , was very

undesirable . It i s al l eged that the average income elasticity

of demand for primary products is significantly l ower than the

average income elasticity of demand for manufactured goods in

the international market which impl ies that when there is an

increase in the level of income , the demand for manufactured

products wi l l increase more than the demand for primary

commodities (Flanders , 1969) . Therefore, specialization (by

less developed countries) in a few primary products for export

and dependent on iJT()Ort of manufactured products fran developed

countries (major exporters of manufactured goods) wil l l ead to

a greater income inequality between the devel oped and l ess

developed countries (Flanders , 1969 : 173 ) . A greater export of

primary products is requi red in order to pay for a

specific volure of imported manufactured goods . Thus , Malaysia

(during the early post-independent period) was in a way worse

off because it was specialized in a few primary products for

10

exports and dependent on irrports of rranufactured goods fran

developed countries .

The above problems related to the over concentration on

agricul tural and primary canoodities provided the irrpetus for

Malaysia to expand the production base and diversify export

(Maisan, 1977 and Ho , 1983) . In the process of di versi fying

the country ' s econ� , the government saw industrialization

( especial ly manufacturing sector) as one of the most �rtant

elements of diversification ( Osman Rani and Haf l ah , 1 9 90 ) .

Consequently, several incentives (wi l l be discussed later) were

introduced to attract foreign and l ocal investors into the

manufacturing sector (Leong, 1990 ) .

Incentives for Investment in Manufacturing

Since the commencement of Malaysia' s industrial ization

era, there have been several policy instrunents and strategies

adopted to promote industrial devel opment . Many incentives

have been offered to local and foreign investors investing in

the manufacturing industries (Asian and Pacific. Developnent

Centre (APDC) and South Paci f i c Bureau for Economic Co­

operation ( SPEC) , 1987; and Yong , 1988) .

Initial l y , right after independence in 1957 ,

introduced Pioneer Industries Ordinance ( PIO) 1958

Malaysia

(Appendix